Are Investors Warming Up To IPOs Yet?

Most companies that have gone public this year are biotech firms and the first quarter marked the slowest start to IPOs since the last recession. In the current quarter, the fact that companies outside of biotech are eyeing or marching through the IPO door may be a sign of a slow thaw?

Last month, Bats Global Inc. BATS raised $253 million in an initial offering that valued the company at $1.8 billion. Bats increased the deal’s size after demand for shares exceeded the 11.2 million originally offered by 20 times.1 After a mere dribble of initial public offerings in this year’s first quarter, the idea that one new issue priced its shares above its asking range then surged 20 percent in its first day of trading was welcome news for investors looking for a sign that the IPO market has started to thaw.

Bats shares closed Monday at $25.97, well above the stock’s $19 IPO price, helped by its first quarterly earnings report last week as a public company. It posted record first-quarter profit thanks to higher market volume and growing market share.2

IPO market a mixed bag so far
But not every IPO has panned out as well as Bats. SecureWorks SCWX, Dell’s security spinoff and the first new tech issue of the year sold eight million shares at $14 each, below its plans to sell nine million shares for between $15.50 and $17.50 each.

A pair of casino stocks also went public this quarter. Red Rock Resorts RRR raised $531.4 million after its shares were priced at $19.50, the midpoint of its target range. REIT MGM Growth Properties MGP, had a respectable IPO, closing at $22.90 Monday, up from its IPO price of $21, which was the high end of its target IPO price range. The biggest IPO of the year so far, MGM raised more than $1 billion. American Renal ARA, which runs dialysis facilities, rose 21 percent on its first trading day from its IPO price of $22.3 Its shares closed $27.59 on Monday.

Other non-biotech IPOs this quarter included these small cap issues: Chinese commodities brokerage Yintech Investment Holdings YIN with an IPO price of $13.50 closing at $13.37 Monday and Global Water Resources GWRS, which offered its shares at $6.25, was at $7.20.

Investors jittery again
IPO prices and the stock market overall had turned around by the start of the second quarter from a gloomy start to 2016. But in more recent days, the market has given back some of its recent gains, gripped by worries of slowing economic growth among other things. The market is now up just 1.5 percent this year.

Yet just weeks ago, on April 18, the Recent IPOs motif had risen 11.9 percent in the previous 30 days, versus the S&P 500’s 2 percent gain of the same period. But as of Monday, the motif is down 3.2 percent for the month, compared to a 0.9 percent gain logged by the S&P 500. The motif did, however, beat the market on three-month performance, up 16.7 percent versus the broad market’s 11.7 percent.

New issues activity in the first quarter fell 73 percent from the 40 IPOs seen in the same period last year. In addition, the $1.2 billion in total proceeds raised in the first quarter of the year pales in comparison to the $6.1 billion raised in the first quarter of 2015, according to PwC.

Still, the fact that several non-biotech companies made it out the IPO door is a sign that we may see more relief from the IPO drought. Renaissance said it expects the first wave of IPOs to comprise fundamentally strong companies with very strong cash flows and/or attractive secular growth angles. In addition, “our data has shown that the first group of IPOs following a period of slow issuance has produced outsized returns,” Renaissance wrote.

Neil Dhar, head of PwC’s U.S. Capital Markets practice, said the second quarter is expected to improve. The IPO market should continue see more breadth this quarter which is likely to be dominated by profitable companies as IPO underwriters look for more defensive stories and executive teams with realistic views on valuation, Dhar said.4

Renaissance believes that a broadening of activity will take time to play out and will need to be accompanied by realistic valuation expectations.

While the firm thought the first quarter was “active” in terms of new tech-company listing applications, it also noted reports of secondary private rounds being shopped at half the last private round. Renaissance’s “best guess” is that the IPO pace of second-quarter activity will be moderate in the second quarter, with the potential for more momentum in this year’s second half, absent another sustained bout of market volatility.